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The Vertical Organization of Industry: Systems Competition versus Component Competition
Author(s) -
Farrell Joseph,
Monroe Hunter K.,
Saloner Garth
Publication year - 1998
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1998.00143.x
Subject(s) - competition (biology) , duopoly , industrial organization , component (thermodynamics) , incentive , profit (economics) , microeconomics , business , vertical integration , economics , vertical restraints , cournot competition , ecology , physics , biology , thermodynamics
We discuss two contrasting styles of vertical organization of complementary activities or components in an industry: systems competition versus component competition. When firms' competencies differ, systems competition is not a perfect substitute for component competition, even with Bertmnd behavior. Costs, prices, industry profits, and the distribution of those profits among firms all differ between the two styles of organization. Moreover, firms' profit incentives do not generally guide them towards the socially efficient form of vertical organization. In duopoly, there is a bias towards open organization (component competition), but with enough firms (three or more, in an exponential example) this bias is reversed.